Financial scenario planning - the Why and How

Edgar de Wit

"Foresight is not about predicting the future, but about minimizing surprises", the Canadian futurist and writer Karl Schroeder once said.

Scenario Planning is a powerful tool to minimize financial surprises and get a grip on the future. Scenarios help deal with uncertainties and respond to them when they occur. But how do you do it?

Using a fictional healthcare facility as an example, I will show you how and why scenario planning makes sense.

This healthcare institution focuses on caring for people with dementia in five residential care centers. It has room for 41 residents and employs 520 staff, totaling 282 FTEs. The net turnover for 2022 was over 25 million, the result over 1 million euros. The care facility faces the challenge of ensuring a balance between the care to be provided to the residents present, the deployment of staff and the coverage of costs. In the annual budget, staff costs, occupancy by residents and deployment of staff in rosters are defined in detail by the departments and branches. Once approved, the budget guides implementation and operations. The budget is also used as a starting point for scenario planning.

Why scenario planning

Scenario planning helps organizations to be resilient in dealing with uncertainties and to be better prepared for future financial challenges. By developing future scenarios, potential risks can be identified, and an organization can better prepare for unforeseen events or circumstances. By thinking about "what if?" scenarios in advance, it is possible to make financial decisions with a better understanding of the consequences under different circumstances.

Scenario planning was introduced by Herman Kahn, who worked for the US Military in the 1950s. At the RAND Corporation he developed a technique of describing the future in stories, which he called scenarios. Kahn founded the Hudson Institute in 1961, that expanded his scenario work to social forecasting and public policy.

Three scenarios: Normal, Best and Worse

Our healthcare institution uses the prepared budget itself as the 'Normal' scenario. In addition, they create a 'Best' and a 'Worst' scenario, based on three 'drivers': bed occupancy, wage growth and inflation adjustment. Each organization can choose its own drivers that can affect the operation, here I keep it simple with a limited number. The idea behind the scenarios is that the organization can keep a close eye on the development of the operation and have knowledge of what effect a particular development is going to have. And what needs to be done to control that effect.

The current figures are used to prepare quarterly reports. Those quarterly reports, in turn, are compared with the prepared scenarios, which are adjusted as needed to reflect the state of affairs. In this way, they can look at the results on three different timelines: realization, budget and the scenarios. This improves their understanding of the situation and the decision-making that is needed. When the number of residents decreases, staff schedules can be intervened, a temporary stop of a form of care can be introduced. Contracts can be adjusted in a timely manner. The idea is that possible financial and planning bottlenecks can be anticipated.

Scenario Planning in Practice

At XLReporting we have lots of experience in scenario planning and developed a template based on that knowledge. The Scenario Planner template calculates different scenarios based on your current budget. Since the budget is detailed, you only use the major points in your scenario planner. In terms of input, you fill in several drivers, such as what the effect is when my sales prices go up, or what the effect is if I hire more people. The Planner calculates this for you and displays the effect in the results on the dashboard.

Support with XLReporting

XLReporting supports the scenario planning process of this healthcare organization by showing the effect of changed parameters through analysis reports. Per care product or per department, they can see where a bottleneck is or where a bottleneck is evolving and take action on it.

Wondering how your organization can benefit from scenario planning? Contact us at XLReporting.

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